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Technology Stocks : DELL Bear Thread -- Ignore unavailable to you. Want to Upgrade?

To: Richard Tsang who wrote (917)	5/28/1998 11:15:00 PM
From: Bilow	Read Replies (1) \| Respond to of 2578

Hi Richard Tsang; I'll try to answer your questions, they are good ones: 1. The outstanding options is 110 million shares and all should be accounted for in calculating the dilution effect... When companies compute earnings per share, they normally use a "fully diluted" basis. This assumes that all in the money options and convertible issues are converted. I think we all agree that this is the way to do it. I'm not sure but what out of the money options are also assumed exercised in a "fully diluted" earnings calculation. Perhaps somebody else will give a final statement about this. 2. I agree that the buyback is a decision of "better use" of money to create value for company. However, I would think that if they did not issue any stock options, the need to buy back would not have been considered, therefore all the money will have stayed as retained earnings in the equity accounts which belongs to shareholder, instead of being deployed to. Companies that have issued options sometimes don't buy back stock. Companies sometimes buy back stock that haven't issued options. The two things just aren't connected. If a company wanted to buy back stock, it might choose to buy back just enough to equal its options grants, but it is an arbitrary decision. 3. The decision to issue stock options and how much to issue to what ranks, etc., rests with the management who are the main beneficiaries of such program. The decision to buy back shares to boost up the stock price is also theirs. I do not think that this is healthy practice. It may be an ethica issue, IMO. I have seen companies borrow money to buy back shares to reduce float and boost EPS, and profit from the rise in stock price as a result (Dell is not in this category as they have plenty of cash). I agree completely, and would also like to note that if the price of DELL drops in the next few years, those employees will probably get their options restruck at a lower strike price. This always tees off the stock holders who suffer without such an advantage. On the other hand, I have been the recipient of restruck options, and it contributed to my not leaving the company for greener pastures. 4. I was once told that the actual cost of the spread (difference between the option price and fair market value on date of exercise) on those that were exercised in the fiscal period can be made a tax deductible expense by way of footnote in the corporate tax return. If that is true, it means the tax authority does recognize such cost as "business expense". Have you seen any such "footnote" in public reports? This is true, but the usual option term to describe the (tax) accounting is that companies can expense the "intrinsic" value of the option at the time it is exercised. The money may show up in the employee's W-2 form as regular earned income (with social security taxes owed), depending on when he exercised, and what he did with the shares. I know how the rules effect the individual, but I am a little fuzzy on how they end up on the company's taxes. Anyway, tax accounting and GAAP are two different things. Companies keep two sets of books. The one for the IRS generally show lower earnings, as the companies take advantage of tax rules to minimize their taxes. What we are talking about here is a tax loop-hole, and is an advantage to the company, and to the shareholders, as it decreases the taxes paid on an event that actually brings cash into the company (i.e. the strike price). But the event does not show up on the income statement, nor should it. The income expense happens at the time of grant. You could argue that the expense at the time of grant should be amortized over the vesting period, but I don't think they do this. In any case, the amortized value of options granted on DELL would be minuscule, as the company originally went public at $.35 per share, after splits. Thus the original options would have fair market values much less than $.35 per share at the time of the IPO. I had forgotten just how complicated this subject can get! -- Carl